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REPORT ON INTERNAL CONTROLS FOR THE YEAR ENDED JUNE 30, 2016
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RECOMMENDATION
It is recommended that the Audit Committee accept by motion the Report on Internal Controls for the year ended June 30, 2016.
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Summary
Presented for the Audit Committee’s review is the City of Stockton’s (City) Report on Internal Controls for the year ended June 30, 2016 (Attachment A).
The City resolved one finding from the prior fiscal year’s report regarding allowances for doubtful accounts, and one new finding was identified expressing concerns over the City’s ability to retain qualified accounting personnel. Three prior findings remain concerning internal controls, lack of an accounting manual and an aged accounting system. The City continues to make progress in these areas, although more time is needed to resolve these findings fully.
DISCUSSION
The Report on Internal Controls provides a review of the City’s financial reporting systems and procedures that are used to ensure accurate financial statements. An internal control is designed to provide reasonable assurance that City objectives regarding the reliability of financial reporting, effectiveness, and efficiency of operations, and compliance with applicable laws and regulations are met. The Auditor considers the City’s internal control over financial reporting during the design of audit procedures for financial statements. The auditors do not express any opinion on the effectiveness of the City’s internal control.
The auditors included four findings in the report for the year ended June 30, 2016. One finding is new, and three findings continued from the prior fiscal year. The City resolved one of the prior year findings because it made significant progress in writing off aged uncollected accounts.
The three remaining findings pertain to 1) internal control systems that increase risk, 2) lack of a full accounting manual that documents processes, and 3) an antiquated financial system that does not support proper levels of internal controls. Management concurs with all findings.
The City has categorized all audit findings and is prioritizing action items with the greatest effect on the City’s internal control structure to mitigate those areas of highest risk. The City made significant progress in implementing effective internal controls and has closed some of the findings, although over 150 open findings still exist.
Now that the City has exited bankruptcy and is in the process of fully staffing the Accounting Division, the City plans to begin drafting the accounting manual and will work with the City’s internal auditors to review and complete this project in 2017.
The City Council approved a solicitation on January 12, 2016, to obtain the services of a consultant to assist the City in procuring a new financial system. On January 24, 2017, Council approved moving forward with a different consultant to assist the City with the selection and implementation of a new financial system and also approved 11 new City positions to serve as the core project team. A software vendor contract is anticipated to be awarded by December 2017.
The auditors identified one new finding concerning the City’s ability to retain qualified accounting personnel. The City completed a full evaluation and revision of the Accountant job description that incorporates more stringent minimum requirements for accounting educational coursework to attract a more focused and experienced professional workforce. The City also revised the test with the same financial and analytical focus. A recent recruitment resulted in the hiring of five accountants who have just begun their employment with the City.
FINANCIAL SUMMARY
There is no financial impact associated with accepting the Report on Internal Controls for the year ended June 30, 2016.
Attachment A - FY 2015-16 Report on Internal Controls